I have two decades of experience trading currencies and fixed income instruments. My market analysis skills were honed during my tenure as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006 as Chief Currency Analyst, I have been publishing a daily commentary on global markets. I lead a team with 24/7 North America, Asia and Europe forex market coverage. Born in Dublin, Ireland, I hold a degree in Economics and Finance from Trinity College Dublin.

Aussie Dollar Nosedives On Poor Jobs Report

It’s not often that investors should be thankful for a disappointing jobs report, but with word that employment Down Under fell by -22.6k jobs in December — far below an expected increase of 10k jobs — it managed to keep foreign exchange (forex) market volatility alert in various cross currency pairings. That stands in stark contrast to what is transpiring with the 18-member single currency: the EUR’s outright flow is somewhat distorted as the bulk of the directional currency action has been held captive by the myriad of EUR cross-flows. Any significant market moves have been few and far between though investors’ risk appetites are improving across various asset classes. Risk has reappeared specifically amongst the Eurozone peripheries, where fixed-income spreads have improved significantly, especially between Portugal and Germany. The yield spread tightened -2.5bps to the bund where outright 10-year product has broken last year’s low point at +5.21% this week, an area that has not been seen in nearly three years.

The Aussie dollar plunged to a new multi-year low on the sharp decline in domestic employment. The Australian unemployment rate has remained unchanged at +5.8%, but only because of a declining labor participation rate, which fell -2bps to 64.6% — a seven-year low. The employment slump effectively brings back the possibility of the Reserve Bank of Australia intervening with further monetary easing, particularly as some of Australia’s recent housing data show signs of deceleration. The currency’s failure to overcome its 50-DMA at 0.9070 earlier this week, and the subsequent breach of both the 0.8851 support line and 0.8822 recent lows, opens the immediate risk to the three-year base channel just north of 0.8700. By contrast, consensus expectations are that the Reserve Bank of New Zealand will be in a position to hike its overnight cash rate as soon as mid-March. This, in turn, has put pressure on the favored trading Australasian pair of AUD/NZD.

IMF Chief Sounds Deflation Alarm

The International Monetary Fund (IMF) Managing Director, Christine Lagarde, expects global growth to strengthen this year; however, she has also voiced concerns about the significant and rising risk of deflation in developed countries. If inflation is the genie, then “deflation is the ogre that must be fought decisively,” she said in a speech at the U.S. National Press Club yesterday. This morning’s Eurozone consumer-price index (CPI) inflation print weakened as expected last month, and it does nothing to dispel any of the price concerns that continue to stalk the currency bloc. Eurostat, the statistical office of the European Union, reaffirmed last week’s preliminary headline release by reporting that consumer prices rose +0.3% from November, and were up +0.8% from the previous December print. This represents a decline in the annual rate of inflation from +0.9% in November, which happens to be below the rate of close to +2% that’s favored by European Central Bank (ECB) President, Mario Draghi, and his fellow policymakers. The “core” has fallen to +0.7%, its lowest level since 2001.

Eurozone Questions Abound

These numbers are sure to get the fixed-income juices flowing as questions to what the ECB is going to do about it will only get louder. After leaving rates unchanged earlier in the month, Draghi firmly assured the market that the ECB would respond aggressively if inflation weakens to “dangerously” low levels, promising further “decisive action.” The pressure is on European policymakers and they will be called upon to spell out precisely how they intend to boost economic growth. Under the guise of transparency, what tools will the ECB use if an immediate course of action is required? It could be that the market’s inflation fears are truly irrational and that worries of a Japanese-like scenario are inappropriate. No matter, the market expects yield differentials to separate the strong from the weak. The very limited rebound in the EUR outright is encouraging speculators to more bearish action. Only a close above the 200-DMA at 1.3628 will curtail building expectations of a 1.3550 push south (last week’s low). The euro bear continues to be led, and not outright via the dollar, but by what’s transpiring in emerging markets. The mighty U.S. dollar, on the other hand, remains fairly stable ahead of this morning’s event risks – CPI, jobless claims data, and the Reserve Bank of Philadelphia’s Business Outlook Survey. A number of Fed heads will also speak today and that includes outgoing Chairman, Ben Bernanke.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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